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There were some high-profile construction insolvencies last year, and although there is some cause for economic optimism in 2010, the climate for construction remains lukewarm at best.

One consequence is that many firms will find that they are pursuing claims against defendants that have become insolvent.

As a consequence of the Third Parties (Rights Against Insurers) Act 1930, a claimant may pursue its remedies and obtain payment against the insurers of the insolvent defendant. If there is liability, this act allows recovery to be made without having to share the money pro rata with all of the firm’s other unsecured creditors. It takes effect as a statutory transfer of rights.

The act has been in existence for 80 years and has been applied successfully on many occasions, but has also been the subject of criticism. This has led to the introduction of the Third Parties (Rights against Insurers) Bill in the House of Lords. It is at its committee stage at present and is yet to be referred to the commons. It is not politically controversial and seeks to implement the findings of the Law Commission’s Recommendations (Law Com No 272). It could become law in the life of this parliament.

The bill proposes that two major procedural obstacles introduced by the act be removed. First, it proposes that the requirement of establishing liability should take place as part of the primary litigation process, and that there is no need to bring separate proceedings beforehand to establish this. In a recently reported decision, a contractor failed in its claim under the act against an insurer. Although it had obtained an adjudicator’s award in its favour, it had failed to obtain a court order rendering it enforceable prior to seeking payment from the insurers. The court concluded that it had not established the insurers’ liability under the act and the contractor’s claim failed. The bill as it stands would remove this iniquity.

The most important change proposed by the bill is to allow a contractor to request details of a failed firm’s cover, including the identities of the insurers and the contract terms

Second, the bill proposes that if the insured is a defunct entity, such as a company whose name has been removed from the Companies Register, it should not be necessary to take steps to reinstate it.

The most important change proposed by the bill is to allow a claimant, if it has reasonable grounds for believing there is a liability owed to it, to serve a request for details of the insurance cover and details of any material circumstances which could provide the insurer with grounds for avoidance. In practice this requirement will be discharged by the disclosure of the policy documents although the wording of the bill does not expressly create this entitlement.

At present, in the absence of voluntary disclosure, this information can only be procured by making an application to the court. It may be refused if the court concludes that liability is not, nor is likely to be, established. At present, claimants are deterred by costs from establishing a liability if they have no idea whether they will be able to succeed against the insurers. Insurers will, for obvious reasons, be reluctant to co-operate.

The bill preserves any defences such as set-off that the insured may invoke as well as defences that the insurer may have for avoiding liability. This typically takes the form of material non-disclosure or breach of any of the policy conditions.

Any new legislation designed to help a claimant recover money from a third party such as an insurer will be welcomed. The bill, when enacted, will facilitate the process but the provision of information envisaged by the bill is unlikely to be the full extent of what is required.There has been an increasing trend by insurers to reject claims alleging that they have an entitlement to avoid the policy. It is unlikely that this trend will change, at least in the short term. Claimants will need the assistance from the insured if such allegations are to be defeated.